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EDI HoldingsEDI HoldingsWelcomes All Welcomes All Stakeholders Stakeholders

Within the Within the RED ONE AREARED ONE AREA

INAUGURAL RED ONE REGIONAL ENGAGEMENT FORUM

CALVINIA

20 JULY 2007

20 July 2007 Slide 3

Agenda

# POINTS FOR DISCUSSION TIME RESPONSIBLE

REGISTRATION 9h00-10h30

1. Opening 5 min Deon Louw: RED ONE RGM

2. Welcoming Address 15 min Executive Mayor Johnson: SALGA

3. Purpose of the Regional Engagement Forum 10 min Deon Louw: RED ONE RGM

4. EDI Restructuring 30 min Dr. W de Beer: COO EDI Holdings

5. Discussions 30 min ALLTEA BREAK@12H00 15 min

6. Municipal Preparations towards RED ONE Establishment 15 min Deon Louw: RED ONE RGM

7. Eskom Preparations towards RED ONE Establishment 10 min ESKOM

8.

Discussions8.1 RED ONE Restructuring Matters8.2 Debate and Acceptance of REF Terms of Reference8.3 Setting Date for First RED ONE Sponsors Committee

30 min ALL

9. Way Forward 10 min Deon Louw: RED ONE RGM

10. Closing Remarks 10 min SALGA Northern Cape

LUNCH @ 13h30 60 min


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To enhance a common and shared vision among stakeholders on RED

establishment

To inform and educate internal and external stakeholders about the

establishment of six wall-to-wall REDs

To proactively engage and mobilise stakeholders for the acceleration of RED

establishment processes

To provide technical support and advice in preparation for the establishment of

six wall-to-wall REDs through working in liaison with the existing RED

establishment structures as well as other relevant provincial and local

government structures

To monitor and evaluate stakeholder readiness for RED ONE

Purpose of the Regional EngagementForum


The Regional Engagement Forum shall comprise of the following members:

EDI Holdings

Eskom Regional representatives

SALGA Provincial Representatives

Municipalities within RED ONE Region

Municipal Manager

Councilor / MMC responsible for Infrastructure and Services

Director responsible for Infrastructure and Services

Head of Electricity Department

Membership of the Regional EngagementForum


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Presentation Outline

Electricity Distribution Industry (EDI) Historical Context

25 October 2006 Cabinet Decision

Key Implementation Enablers and Their Status

What are REDs?

How will we get there?

Stakeholder Engagement

Conclusion


EDI HISTORICAL CONTEXT


Industry

Business

Residential

Scheduling

Physical Energy Flow

Financial Flow

Municipalities

Metering & Billing

Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flowsfollowing the same path

ESKO

M

Current Electricity Supply Industry Structure

180


Current industry structure is highly inefficient owing to fragmentationAbsence of economies of scale in respect of investing in assets, sharing offacilities, services, people development.

Inadequate maintenance of networksEstimated maintenance backlog: R5 bn accumulated over the past 10 years

Supply interruptions cost to the Economy: R2.9 bn to R 8.6 bn p.a.**

Inequitable treatment of consumers across the countrySignificant variance in average tariffs by Distributors:

Inconsistent Electrification Performance

Access to electricity: ~73 % (National)

Slow and Inconsistent Roll-Out of FBE

Current rollout is less than 40% of targeted community

Key Challenges Facing the EDI

** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study - 2005


EDI Restructuring Objectives

Energy White Paper Objectives (1998) EDI Restructuring Blueprint Objectives (2001)

• Ensure electrification targets are met • Achievement of government’s electrification programme• Universal access to electricity for all South Africans

• Provide low-cost electricity • Sustainable electricity supply to low-income consumers,regardless of location, at affordable prices

• Facilitate better price equality

• Improve the financial health of the industry • Future REDs to operate on a sustained, financially viablebasis as independent businesses

• Improve quality of service and supply • Acceptable and sustainable levels of supply security andquality

• Foster proper co-ordination of operations andinvestment capital

• Attract and retain competent employees • Future REDs to provide secure employment to theiremployees, provide skills development and trainingconsistent with a high technology, modern distributionbusiness

• Transition to be done within the context of a comprehensivehuman resources strategy and an agreed social plan

• Planned and managed transition


Early 1990s

Considerable Debate over EDI

1997

RED s Approach EndorsedERIC Report

1999

Cabinet ApprovedStart of Restructuring Process

End 1999

EDIRC Established

April 2000

Appointment of PWC

Aug 2000

Blueprint Approved by EDIRC

May 2001

Blueprint approved by Cabinet

July 2003

EDI Holdings established

July 2005

RED 1 established

Sept 2005

Cabinet decision

History of Restructuring

Oct 2006

Cabinet decision


CABINET DECISION: 25 OCTOBER 2006


Having considered technical submissions on:The financial viability of the different RED models;

The institutional and governance arrangements for the REDs; and

How the various models respond to the restructuring policy objectives.

The Cabinet approved the following:That 6 wall to wall REDs be implemented;

That the REDs be established as public entities and be regulated according to the PFMA and theElectricity Regulation Act;

That Eskom becomes a shareholder in the respective REDs for a transitional period and that theyreduce their shareholding over time;

That DME, through EDI Holdings, will oversee and control the establishment of REDs;

That a roadmap will be put in place to move from the current scenario into the future industrystructure

That a strategy needs to be developed to deal with capital investment requirements for the REDs

That EDI Restructuring legislation will be introduced; and

That a National electricity pricing system will be developed.

Cabinet Decision: 25 October 2006


KEY IMPLEMENTATION ENABLERS AND THEIR STATUS


Key Considerations and ImplementationEnablers

Key Implementation Enabler Responsible StatusGovernance of the REDs DME This issue will be addressed in the EDI

Restructuring Bill

Electricity Restructuring Legislation DME The process is driven by DME and indication from them is that the Electricity Restructuring Act is targeted for mid 2007

Promulgation of Asset Transfer Framework to enable effective and orderly transfer of assets from local government and Eskom to the REDs

National Treasury NT exempted municipalities and municipal entities from sections 14 & 90 of the LG: MFMA with regard to electricity transfers.

National Electricity Pricing System NERSA The process is driven by NERSA

National Tariff Harmonisation Framework to ensure rationalisation of tariffs nationally

NERSA EDI Holdings will submit a position paper by 31 March 2007 for input into the NERSA process

Salary Harmonisation Framework EDI Holdings A proposal served at the TLRS during January 2007 as part of the process of addressing the COS and salary harmonisation

Capital Investment Strategy for Infrastructure DME /EDI Holdings

Will be attended to through the REDEstablishment Business Case

Surcharge Principles Framework National Treasury The principles are being covered in the MunicipalFiscal Powers and Functions Bill to bepromulgated during 2007

Local Government Amendment Bill dplg Considering relaxing of MSA S78 process


FUTURE REGIONAL ELECTRICITY DISTRIBUTORS (REDs)


6 Wall-to-Wall RED Boundary Map

RED 1

RED 4

RED 2

RED 3

RED 6

RED 5

Provincial Boundaries

Cape Town

Nelson Mandela Bay Metro

(Port Elizabeth)

eThekwini Metro(Durban)

Ekhuruleni Metro

Tshwane Metro(Pretoria)Johannesburg

Metro


REDs Statistical Information

DESCRIPTIONRED ONE

RED TWO

RED THREE

RED FOUR

RED FIVE

RED SIX

2004 FIGURES

No of customers: Eskom No 279122 363832 496490 636527 506564 1234667

No of customers: Municipality No 977742 936180 536661 651320 889157 819781

Energy Sales: Eskom TWh 3.860 4.112 1.312 6.597 3.186 7.644

Energy Sales: Municipality TWh 11.269 11.671 4.818 12.945 14,745 13.737

Assets: Eskom Rbn 2.196 2.694 2.297 3.414 3.652 6.375

Assets: Municipalities Rbn 3.581 4.154 2.693 5.537 5.731 2.634

Personnel No 5069 5059 2649 5707 5302 7899

Revenue Rbn 5.169 4.775 1.959 5.268 5.119 5.957

Current Surplus Transfer (Unaudited) Rm 345 454 207 388 377 101

5 YEAR PROJECTED

Refurbishment Capital Requirement Rbn 1.437 1.923 1.307 2.197 2.833 2.444

Maintenance Backlog Rbn 0.581 0.704 0.245 0.837 0.405 1.017

New Work Rbn 0.753 1.422 1.759 1.336 2.948 2.370


New companies into which both municipalities and Eskom will transfer their electricity

distribution businesses

Shareholding to be split between Eskom, National and Local Government

Service providers of choice to the service authorities:

Municipality remains service authority and RED becomes Service provider

REDs will collect surcharges in accordance with the Municipal Fiscal Powers &

Functions Bill on behalf of the municipalities and pay it over to them

REDs will pay dividends to shareholders subject to financial performance

Relationship between RED and municipalities to be governed through the Service

Delivery Agreement as contemplated in Section 81 of Municipal Systems Act

Streamlined relationship reducing duplication and creating clear accountability

Better regulation with role clarity between service authorities, service providers and

the National Energy Regulator of South Africa

Future REDs (…1)


Decentralised geographical service delivery

Enable Government’s social policy, e.g. electrification and free basic electricity

Single institution

Focus on service

Consistency in operating policies and application across RED geographical area

Development and application of best practices

Support Government’s objective of universal access to electricity by 2012

Become more efficient and able to service customers equally well, at realistic tariff levels

through:

Lower Interest charges due to improved access to capital markets

Efficiencies in “non-payroll” related areas, i.e., general costs

Accounts Receivable. Using best practices in a reasonable, good faith effort

approach to reduce bad debt accounts

Future REDs (…2)


Municipal Revenue Stream

Municipalities will continue to derive income from electricity sales within their area of

jurisdiction

The income will be based on the current audited revenue generated from electricity

sales and transferred to the municipality to support other services

The method through which municipalities will receive a continued revenue stream from

electricity sales would be through:

A surcharge to customers on electricity sales

Dividends from the relevant RED, subject to financial performance and within the

approved policy of the relevant RED

Surcharges collected by the RED will be paid over to the relevant municipality on a

basis agreed to between the relevant municipality and the RED

20 July 2007 Slide 26Slide 26

RED Future Business Model

Bundled but clearly demarcated wires and retail businesses

Wires business key characteristics:Asset intensive

Capital intensive

Geared for serving an one to many relationship

Monopoly business with strong regulation

Retail business key characteristics:Customer driven

Trading in energy

Products and services aligned according to market segmentation

Business geared towards competition and less regulation

Shared corporate and support services to wires and retail

Focus on buy in of services to avoid stranded costs and duplication

Business model to be customised to complement the geographical composition of theRED area of jurisdiction


Indicative RED Topography

AREA OFFICEAREA OFFICE

AREA OFFICE

DEPOT

DEPOT

DEPOT

DEPOT

DEPOT

DEPOT

DEPOT

DEPOT

DEPOTHEAD

OFFICE


Roles and Responsibilities

ROLE RESPONSIBILTY

Shareholder Establish and contract shareholders compact with RED BoardMonitors the performance of the REDDefine socio and economic requirementsDefine business performance expectations Appoint the Board and CEO

RED Board Ensure compliance with the shareholders compactEstablish RED Policy, Direction and Compliance requirementsDevelop and implement strategies to create shareholder value and to ensure effective service deliveryEnsure governance, legal, regulatory and policy complianceAppoint Executive Management

RED Management Develop and implement strategies to create shareholder valueEnsure effective business operations and complianceEnsure effective service deliveryAppoint resources and ensure effective resource management


Relationship Governance

Relationship Owner Relationship Partner Governance Instrument

National Government RED Board Shareholders AgreementShareholder CompactBusiness Plan

Local Government (Service Authority)

RED Board (Service Provider) Shareholders AgreementService Delivery Agreement (SDA)

Eskom Holdings RED Board Shareholders AgreementAsset Transfer Agreement

RED Board RED Management Business PlanPerformance Contract

National Energy Regulator of South Africa (NERSA)

RED Board NERSA Licence


HOW WILL WE GET THERE?


Generic RED Establishment Roadmap


Regional Project Governance Structures


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20 July 2007 Slide 34Slide 34

QUESTIONS/DISCUSSIONS


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MUNICIPAL PREPARATIONS TOWARDS RED FOUR

ESTABLISHMENT


RED ONE

Calvinia


6 wall-to-wall REDs as approved by Cabinet in May 2001 & October 2006Mainly 2 Provinces: Western Cape & Northern Cape and a small part of EasternCapeMetro: City of Cape TownEskom Region: Western36 Local Municipalities8 District Municipalities

Key StatisticsNo of customers - 1,256,864Sales (GWh) - 15,129Revenue (R’m) - 5,169Assets (R’m) - 5,777Employees - 5,170

Strategic ApproachEskom Western Region as “footprint”“Critical mass”Leverage on the work done in establishing the RED1 (2005)Phased Approach

About RED ONE


Municipal Preparations for RED Readiness

Council Resolution that the Municipality participate in RED ONE establishment

Accession to Co-operative Agreement

Legal Compliance

MSA Section 78 process

Ringfencing of Electricity Distribution Business

Participation in the RED ONE Regional Project Governance Structures


State of Readiness: Municipalities within RED ONE (…1)

Municipality MSA S78 RingfencingAccession Agreement

Matzikama Local Municipality (WC011) No No No

Cederberg Local Municipality (WC012) No No No

Bergrivier Local Municipality (WC013) No No No

Saldanha Local Municipality (WC014) No No No

Swartland Local Municipality (WC015) No No No

West Coast District Municipality (WC01) No No No

Witzenberg Local Municipality (WC022) No No No

Drakenstein Local Municipality (WC023) Yes Yes Yes

Stellenbosch Local Municipality (WC024) Busy Busy No

Breede Valley Local Municipality (WC025) Yes Yes No

Breede River/Winelands Local Municipality (WC026) Busy Busy No

Cape Winelands District Municipality (DC02) No No No

Theewaterskloof Local Municipality (WC031) No No No

Overstrand Local Municipality (WC032) No No No

Cape Agulhas Local Municipality (WC033) No No No

Swellendam Local Municipality (WC034) No No No

Overberg District Municipality (DC03) No No No




Kannaland Local Municipality (WC041) Yes Yes No

Hessequa Local Municipality (WC042) Yes Yes No

Mossel Bay Local Municipality (WC043) Yes Yes No

George Local Municipality (WC044) Yes Yes No

Oudtshoorn Local Municipality (WC045) Yes Yes No

Bitou Local Municipality (WC047) Yes Yes No

Knysna Local Municipality (WC048) Yes Yes No

Eden District Municipality (WC04) No No No

Laingsburg Local Municipality (WC051) Yes Yes No

Prince Albert Local Municipality (WC052) Yes Yes No

Beaufort West Local Municipality (WC053) Yes Yes No

Central Karoo District Municipality (DC05) No No No

Richtersveld Local Municipality (NC061) No No No

Nama Khoi Local Municipality (NC062) No No No

Kamiesberg Local Municipality (NC064) No No No

Hantam Local Municipality (NC065) No No No

Karoo Hoogland Local Municipality (NC066) No No No




Khai-Ma Local Municipality (NC067) No No No

Namakwa District Municipality (DC06) No No No

Kareeberg Local Municipality (NC074) No No No

SiyathembaLocal Municipality (NC077) No No No

Pixley Ka Seme District Municipality (DC07) No No No

Mier Local Municipality (NC081) No No No

!Kai! Garib Local Municipality (NC082) No No Yes

Khara Hais Local Municipality (NC083) No No No

!Kheis Local Municipality (NC084) No No No

Siyanda District Municipality (DC08) No No No

Eskom n/a Yes Yes

City of Cape Town Metropolitan Municipality Yes Yes Yes


Accession Agreement

EDI Co-operative Agreement entered into between National Government (DME),SALGA, Eskom Holdings Limited, EDI Holdings and NERSA during 2002

All Municipalities and Municipal Entities become party to this agreement by way of theAccession Agreement

On signing the Accession Agreement, Municipalities undertake to:

Provide the necessary assistance to EDI Holdings to enable it to meet itsobjective of restructuring the EDI in accordance with the overall intent of thereform process

Ringfence its Electricity Business (where applicable) in a manner agreed withEDI Holdings in preparations for the establishment of the REDs

Use their best endeavour to initiate the required process in terms of theMunicipal Systems Act

Keep EDI Holdings promptly and fully informed of any activities that wouldmaterially affect the business and/or the objectives of EDI Restructuring


MSA Section 78

What is a Section 78 Assessment:

A Section 78 Assessment is a process required by the MSA to assess potential

service delivery mechanisms for the provision of a municipal service

Purpose of a Section 78 Assessment:

To select the most appropriate and optimal service delivery mechanism that will

ensure access to services for all.

Methodology for a Section 78 Assessment:

Assessment of Internal Mechanism [S78(1)]

Decision by Council [S78(2)]

Exploration and Assessment of External Mechanism [S78(3)]

Decision by Council [S78(4)]


MSA Section 78 Process

STEP 1STATUS QUO ASSESSMENT

STEP 2ASSESS INTERNAL SERVICE DELIVERY MECHANISMS

STEP 3DECIDE

STEP 4IMPLEMENT APPROPRIATE INTERNAL

SERVICE DELIVERY MECHANISMS• Allocate sufficient human, financial and other

resources necessary for proper provisioning of the service

STEP 4GIVE NOTICE TO THE LOCAL COMMUNITY

STEP 5• Assess external service delivery mechanisms• Conduct a feasibility study

STEP 6DECIDE

On Internal Mechanism

EXTERNALINTERNAL

On External Mechanism


Ringfencing in Context

Ringfencing is the initial step to the process of RED creation, during which the Electricity

Distribution Business is separated from the parent municipality for incorporation into the

RED

Electricity Distribution Business

Wires Activities

Retail Activities

Functional Support Activities

Ringfencing Phases

Financial Ringfencing

Operational Ringfencing

Human Resources Ringfencing

Consider establishing an internal EDI Restructuring Steering Committee


EDI Holdings Support

Toolkits available for:

Ringfencing

MSA S78

Modeling Information

Financial

Statistical

Funding

NERSA approved, through Eskom Multi Year Price Determination, the allocation

of R1,2bn over a 3 year period

Projects initiated after 1 April 2006 will be considered for pro-rata funding

Establishment of a Central Panel of Service Providers for Ringfencing and MSA

S78


MFMA Act, 2003 (Act No.56 of 2003): Exemption

To facilitate the EDI restructuring National Treasury provided exemption fromcertain specific provisions of the MFMA (Government Gazette No. 29781, 05 April2007)Municipalities and Municipal Entities are exempted from or in respect of theprovisions of sections 14 and 90 of the MFMA subject to the following conditions:

Exemption relates to the transfer of ownership or otherwise disposal of capitalassets (moveable and immoveable), owned by municipalities and used for theprovision of electricity reticulation and other electricity services, to REDs or publicentities

The exemption requires that:Municipalities must enter into a Service Delivery Agreement (SDA) and any otheragreement with the relevant REDMunicipalities must undertake a due diligence and ringfence their electricity businessAll capital assets, current assets, loans and liabilities associated with the assets tobe transferred to the relevant RED must be identifiedAll the assets to be transferred to the relevant RED must be recorded in an assetregisterAssets to be transferred must be valued through a transparent and auditablemethodology


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ESKOM PREPARATIONS TOWARDS

RED ONE ESTABLISHMENT


Eskom Preparations towards RED ONE Establishment

PROGRAMME 726

The Financial, People & Communication streams are all complete.

Retail Stream

± 2000 customers to be transferred between regions, This will occur during

June 2007

Wires Stream

Some metering points still outstanding. To be completed by end of October

Regional Internal Boundary Optimisation (RIBO) project completed to be

signed of between regions.

One Technical service area (TSA) to be established as normal business

The BP&S stream is reliant on the changes to the others streams and will

complete all changes during June with system shut down


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QUESTIONS / DISCUSSIONS


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WAY FORWARD


Conclusion

EDI Holdings welcomes the certainty created by the Cabinet Decision to create 6 wall towall REDs as Public Entities, regulated under the PFMA

EDI Holdings would like to urge RED ONE Municipalities to support the implementationof the Cabinet Decision by:

Signing Accession Agreement; and

Commencing the preparatory work:

MSA Section 78

Ringfencing

Due Diligence

Join the Engagement Forum

EDI Holdings will continue to work with all industry players to ensure fast-tracking of therestructuring process in order to ensure the realization of the restructuring objectives


EDI Holdings RGM Contact Information

Name Telephone Number

Cell phone Email Address

Deon Louw (RED ONE)

021 446 2070 083 631 2240 [email protected]

Thandi Mazibuko(RED TWO)

012 316 7733 082 653 2191 [email protected]

Nigel Waters(RED THREE)

043 705 9634 082 449 0142 [email protected]

Nhlanhla Zondo(RED FOUR)

012 316 8001 082 449 0142 [email protected]

Nigel Waters(RED FIVE)

043 705 9634 082 449 0142 [email protected]

Diamond Mushwana(RED SIX)

082 829 5078 [email protected]


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